China’s central bank yesterday said it would “adjust” liquidity to ensure stability after a weeks-long squeeze that has rattled financial markets.
The assurance from People’s Bank of China (PBOC) Governor Zhou Xiaochuan (周小川) helped Chinese share prices perk up after a recent sell-off that rippled across Asia and worldwide.
Anxiety about tightening credit has been spreading into the broader economy, with some Chinese firms reportedly running short of cash to settle suppliers’ bills.
However, addressing a financial forum in Shanghai, Zhou said: “The PBOC will use all sorts of instruments and measures to adjust the overall liquidity level, so as to ensure the overall stability of the market.”
For roughly three weeks, funds have been in short supply on China’s interbank market, and the interest rates banks charge to lend to each other have surged to record highs.
The PBOC was said to be worried about a speculative boom in credit fueled by low rates, but on Tuesday confirmed it had already offered liquidity “support” to banks and pledged to provide more if needed.
That statement marked an apparent change of course after the central bank earlier ruled out providing fresh funds and ordered banks to put their financial houses in order.
The comments on Tuesday came after Chinese stocks had closed at lows unseen since the global financial crisis in 2009.
Yesterday’s new assurances helped the benchmark Shanghai Composite Index overcome opening losses to close 1.5 percent higher at 1,979.20 points.
However, analysts said the PBOC would have to take more radical action for the market to rise more.
“Zhou’s speech is in line with the central bank’s earlier statement and the expectations of the market, so the impact is limited,” Haitong Securities analyst Zhang Qi (張崎) said.
Zhou remained confident about China’s growth, though he acknowledged the economy had slowed.
“The Chinese economy, basically speaking, has kept stable growth,” the central bank chief said.
“The growth rate has slowed down a little bit, but the growth rate is still in a reasonable range,” he said, but gave no specific figure.
China has set its economic growth target at 7.5 percent for this year.
China’s economy, a crucial driver of global growth, expanded 7.8 percent last year — its slowest pace in 13 years — and recorded a surprisingly weak 7.7 percent expansion in this year’s first quarter, well below forecasts.
Zhou said China would maintain its current monetary policy, although he hinted at possible fine-tuning.
“The PBOC will continue to maintain a prudent monetary policy and fine-tune when and as appropriate,” he said.
Some analysts forecast China could loosen monetary policy by lowering the level of funds that banks must hold in reserve, or even cutting interest rates if economic growth slows sharply.
China is due to announce the figure for second-quarter GDP on July 15.
Despite the fears of a slowdown, Zhou pledged that China would push forward with economic reforms, including freeing up capital flows in and out of the country.
“China is poised to further open up its capital account,” he said, adding the timetable would be flexible.